Voodoo Economics

What Is Voodoo Economics?

Voodoo Economics is a derogatory term used by George H.W. Bush before he became vice president to describe President Ronald Reagan’s economic policies, which came to be known as “Reaganomics.”

Ronal Reagan was the 40th U.S. President (1981-1990). The economic policies of Ronald Reagan aimed at reducing taxes, reducing inflation by controlling the money supply to the market, and reducing government spending to improve the country’s economy.

In 1980, before George H.W. Bush was appointed as Ronald Reagan’s vice president, he argued that his supply-side policies of Reagan would not be able to rejuvenate the country's economy but also drastically increase the country's national debt.

The policies during the Reaganomics were introduced due to a stretched period of economic stagflation, having started under President Gerald Ford in 1976.

Theoretically, Voodoo Economics or Reaganomics aims to encourage spending, boost, and invest in the economy. It refers to the neo-liberal economic policies Promoted by Ronald Reagan, the 40th U.S. President.

Such policies are commonly linked to and referred to as trickle-down economics, supply-side economics, or voodoo economics, as named by opponents. But Reagan and his associates preferably referred to it as free-market economics.

How Does Voodoo Economics Work?

The country suffered several years of stagflation, during which high unemployment rates were accompanied by high inflation. The Federal Reserve Board increased the short-term interest rate to fight the high inflation rate, which was at its peak in 1981.

Ronald Reagan put forward a four-pronged economic policy or four pillars of success to reduce inflation, stimulate growth, and increase employment. They are:

Pillar 1. Reduction in Government Expenditures

The expenditures of the government grew but at a slower pace than before. Ronald Reagan reduced or cut funding to various domestic welfare programs, including Education, Food stamps, Social security, and employment training programs.

Any unwanted social expenditure was cut down, which was then re-routed towards military and defense expenditures. 

It focused on expenditures of national defense, as Reagan believed that the U.S. was exposed to the Soviet Union and their nuclear weapons, referred to as the “Window of Vulnerability.” 

Due to the focus on defense and military expenditures, the U.S. benefited from this. It became one of the strongest countries in the world, with advanced, high-power technology and a strong, well-trained military force.

Pillar 2. Reduction in Tax

A bulk reduction in tax was made for the high earners of the society. The top-bracket income taxes were reduced from 70% to 28%, and the corporate taxes were reduced from 48% to 34%.

Taxes were exempted for poor and low-income people by increasing the excise duty rates and deducting taxes from income, which led to more savings and investment. The goal was not only to simplify tax codes but also to reduce taxes.

Pillar 3. Reduction in Government Regulation

To restore the unstable economy, Ronald Reagan removed the price controls on U.S. oil and gas prices that President Nixon implemented.

He relaxed the restrictions of the Clean Air Act and reduced the usage of the financial service industry. 

He also lowered the usage of shipping by ocean, interstate bus service, cable, and telephone service. The Department of the Interior also opened up large areas for oil drilling. 

As a result of the reduction in government regulations, imports decreased, whereas exports increased.

Pillar 4. Slower growth of money to reduce inflation

After being elected as president, Ronald Reagan encouraged the tightening of the money supply by the Federal Reserve, which had already started during his presidential term of Carter as a three-year-long contraction.

The contract was intended to reduce inflation which had already reached double-digit figures by the start of Ronald Reagan’s presidency.

Voodoo Economics: A Brief History

Before Ronald Reagan's administration, the United States experienced a high unemployment rate and high inflation (stagflation). As a result, attacks on Philips Curve and Keynesian economic orthodoxy grew.

The expansion of the money supply was favored by political pressure. The wage and price controls of President Richard Nixon were phased out.

Ronald Reagan intended to lower taxes, and his approach was completely different from his predecessors'. Subsequently, he decreased the marginal tax rates and simplified the income tax codes.

Before George H.W. Bush, also known as Bush Sr., became Ronald Reagan’s vice president, he did not favor his running mate’s economic policies. 

In 1976, the economic stagflation that began under President Gerald Ford was under Ronald Reagan’s power for a prolonged period. 

In response to this economic stagflation, he ordered numerous tax cuts, lowered government expenditures, reduced inflation by tightening the supply of money, and reduced regulation of domestic markets.

Ronald Reagan's economic policies are based partially on the principle of supply-side economics, which is a macroeconomic theory stating that economic growth is possible if taxes and inflation are reduced. 

According to Reagan, a tax reduction would ultimately increase government revenue. He also believed that the savings generated by companies from a reduction in corporate tax would eventually trickle down into the rest of the economy, resulting in growth.

He also believed that the companies would end up paying more corporate tax in return for boosting the government's coffers, as a healthy economy will always be better.

The idea was that because of the cheaper goods, consumers would be able to benefit, and in return, there would be a decrease in unemployment.

The reduction of corporate tax will bring more money into the consumer’s wallet, stimulating business growth. This will lead to more hiring and a decrease in unemployment, resulting in a more extensive tax base and more revenue for the government.

The policy is also called trickle-down economics as reduced taxes on business, and the wealthy people will increase investments by stimulating business growth, and the benefits of such will trickle down to the rest of the underdeveloped economy.

The policies of Reagan were a drastic change from those of Presidents Johnson and Nixon, who both made the same decision to increase the role of government in the economy.

President Reagan thought of adopting a more laissez-faire approach, ultimately resulting in reducing the role of government. 

In 1980, George H.W. Bush described the policies of Ronald Reagan as “Voodoo Economics.” According to Bush Sr., Supply-side policies were not enough for the growth of the economy, which will end up increasing the national debt.

After George H.W. Bush was appointed as the vice president of Ronald Reagan, he changed his opinion firstly by denying that he called Reagan’s policies “voodoo” and then saying that he was “joking” about the whole voodoo term used.

Contributions of Voodoo Economics

The overall result of voodoo economics was positive. People’s standard of living increased drastically, and there was a decrease in unemployment and a massive improvement in economic conditions. 

According to some economists, Reagan’s economic policies were the most important part of bringing the third most peaceful economic era in U.S. history. 

During Reagan's presidential term, the GDP grew to an average of 3.5%, which was 2.9% higher than in the previous eighteen years. 

There was a massive fall in the misery index (inflation rate added to unemployment rate), reduced from 19.33% to 9.72% under the administration of Reagan. This was the greatest improvement in employment after Harry S. Truman. 

Let us see how Reaganomics contributed to the different sections of society and the economy:

1. Employment

The rate of jobs grew by 2% annually during the presidency of Reagan, while 3.1% under Carter, 2.4% under Clinton, and 0.6% under George H.W. Bush.

The growth of jobs under the presidential term of Reagan averaged 168,000 per month, while it was 216,000 for Carter per month, 55,000 for H.W. Bush per month, and 239,000 for Clinton per month. 

According to some commentators, over one million jobs were created in a single month. i.e., September of 1983. 

2. Wages

Due to the high rate of inflation, wages declined. The average real hourly wage for production and workers has continued to decline since 1973, but at a slower rate, and it was below the pre-Reagan level in every Reagan year. 

Critics of Ronald Reagan argued that his neoliberal policies were responsible for the stagnation of wage rates over a few decades.

3. Level of Poverty

The percentage of the population below the poverty line increased from 13% in 1980 to 15.2% in 1983, then fell again to 13% in 1988. Homelessness was a notable problem during Ronald Reagan's first term. 

As Ronald Reagan said to David Brinkley, the homeless people make their own choice to stay on the streets, and according to him, there were enough shelters in the city for their stay of homeless people. 

4. Income tax and Payroll tax levels

The federal receipts of the fiscal year increased from $599 billion to $991 billion, whereas the federal outlay of the fiscal year drastically increased.

During Ronald Reagan's two presidential terms, 1993, the top 10% of taxpayers paid an increased share of income taxes to the Federal government, while the 50% of the lowest taxpayers paid a reduced share of income tax revenue.

It was according to the report of the Joint Economic Committee of the United States Congress in 1996. 

Criticism and Validation of Voodoo Economics

Almost everyone criticized George H.W. Bush for characterizing Ronald Reagan’s (his then-political rival) political policies as “voodoo economics.” His spiteful words were viewed by many as a way to discredit Reagan as he ran against him in the Republican primary.

According to the general belief, motivating the wealthy would enhance expenditures and increase confidence among the lower class as their salaries grew and the economy was brought out of recession. 

It was also believed that less government expenditure would boost the financial industry. Though all the expectations were not met, some were extremely fruitful, giving society and the economy the needed boost.

During the first two terms of Reagan’s presidency, there was a decrease in the rate of unemployment, the rate of income rose, and inflation was under control.

The growth of jobs under the presidential term of Reagan averaged 168,000 per month, while it was 216,000 for Carter per month, 55,000 for H.W. Bush per month, and 239,000 for Clinton per month. 

Many criticisms of Ronald Reagan's policies were validated. His policies contributed to the doubling of the national debt due to the increase in military and national expenditure.

There was an expectation that the decreased taxes on wealthy people of society and businesses would result in increased expenditure on their parts of services and goods, but that also failed to succeed.

Due to the high rate of inflation, wages declined. Critics of Ronald Reagan argued that his neoliberal policies were responsible for this, which led to the stagnation of wages over a few decades.

The percentage of the population below the poverty line increased from 13% in 1980 to 15.2% in 1983, then fell again to 13% in 1988. Homelessness was a notable problem during Ronald Reagan's first term.

Conclusion

Reaganomics, sometimes known as "voodoo economics," is a noteworthy period in American economic history distinguished by its audacious attempts to stimulate the economy through deregulation, tax cuts, and lower government expenditures.

Ronald Reagan's policies were heavily criticized for their negative consequences on poverty, economic inequality, and the national debt, even if they did result in significant outcomes like job creation and robust GDP growth.

Reaganomics' ongoing controversy reminds us of the complexity of economic policy and the range of effects it may have on society.

Advocates highlight its achievements in promoting economic expansion and well-being, while detractors contend that its focus on trickle-down economics worsened income disparities, expanded the wealth divide, and neglected to attend to the needs of the most marginalized segment of society.

Reaganomics' legacy is further tainted by its role in the debt ceiling's doubling as well as its poor performance in tackling social welfare issues like homelessness and poverty.

Reaganomics' varied effects highlight the complexity of economic policy and serve as a reminder of how crucial it is to strike a balance between social justice and equity and economic prosperity.

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Contagion
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• Financial Economics
• Inflation
• Macroeconomics